The Impact of FFG(X) on the US Shipbuilding Supplier Industrial Base
Washington, District of Columbia-- May 3, 2019-- Issue: By law, US Navy ships are required to be built in US shipyards (10 USC §7309). The national security justification for this is clear—whether it relates to sensitive nuclear technology, security of the supply chain, or maintenance of critical capabilities and skills in our industrial base. However, there is no such requirement for critical HM&E components—propulsion systems, machinery control systems, shafts, bearings, ships service power generation and many others—to be manufactured in the US.
The US Navy has historically selected US manufactured components for its major surface combatants and designated them as class standard equipment to be procured either as government-furnished equipment (GFE) or contractor-furnished equipment (CFE). In a major departure from that policy, the Navy has imposed no such requirement for the FFG(X), the Navy’s premier small surface combatant. The acquisition plan for FFG(X) requires proposed offerings to be based on an in-service parent craft design. Foreign designs and/or foreign-manufactured components are being considered, with foreign companies performing a key role in selecting these components. Without congressional direction, there is a high likelihood that critical HM&E components on the FFG(X) will not be manufactured within the US shipbuilding industrial supplier base.
Background: In its September 2018 report “Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States,” the Administration states:
“America’s manufacturing and defense industrial base...supports economic prosperity and global competitiveness, and arms the military with capabilities to defend the nation. Currently, the industrial base faces an unprecedented set of challenges: ...the decline of critical markets and suppliers; unintended consequences of U.S. Government acquisition behavior; aggressive industrial policies of competitor nations; and the loss of vital skills in the domestic workforce. Combined, these challenges ... erode the capabilities of the manufacturing and defense industrial base and threaten the Department of Defense’s (DoD) ability to be ready for the ‘fight tonight,’ and to retool for great power competition.” [emphasis added]
The President’s FY2020 budget submission states:
“[T]he Budget invests $286 million in DOD efforts to ensure a robust, resilient, secure, and ready manufacturing and defense industrial base. DOD’s investments to implement this comprehensive, Government-wide effort demonstrate that manufacturing and the defense industrial base are vital not only to the Nation’s economic security, but also to national security.” [emphasis added]
Current Status: The President’s budget requests $1.281B for design and acquisition of the lead ship of the FFG(X) program, a “lethal and survivable multi-mission small surface combatant to address increasingly complex threats in the global maritime environment.” The program calls for procurement of 20 ships at the rate of two per year after the lead ship is awarded in FY2020. The ships will have multi- mission capability to conduct AW, ASW, SUW, EMW and ISR; will have standard Navy systems across radar, combat system, C4I, and launcher elements; will support Distributed Maritime Operations and relieve large surface combatants through improved offensive, defensive, and detection capabilities.
The Navy’s requirements are very clear regarding the combat system, radar, C4I suite, EW, weapons, and numerous other war-fighting elements. However, unlike all major surface combatants currently in the fleet (CGs, DDGs), the draft RFP for the FFG(X) does not identify specific major HM&E components such as propulsion systems, machinery controls, power generation and other systems that are critical to the ship’s operations and mission execution. Instead, the draft RFP relegates these decisions to shipyard primes or their foreign-owned partners, and there is no requirement for sourcing these components within the US shipbuilding supplier industrial base.
The draft RFP also does not clearly identify life-cycle cost as a critical evaluation factor, separate from initial acquisition cost. This ignores the cost to the government of initial introduction into the logistics system, the training necessary for new systems, the location of repair services (e.g., does the equipment need to leave the US?), and the cost and availability of parts and services for the lifetime of the ship. Therefore, lowest acquisition cost is likely to drive the award—certainly for component suppliers.
Further, the US Navy’s acquisition approach not only encourages, but advantages, the use of foreign designs, most of which have a component supplier base that is foreign. Many of these component suppliers (and in some cases the shipyards they work with) are wholly or partially owned by their respective governments and enjoy direct subsidies as well as other benefits from being state owned (e.g., requirements relaxation, tax incentives, etc.). This uneven playing field, and the high-volume commercial shipbuilding market enjoyed by the foreign suppliers, make it unlikely for an American manufacturer to compete on cost. As incumbent component manufacturers, these foreign companies have a substantial advantage over US component manufacturers seeking to provide equipment even if costs could be matched, given the level of non-recurring engineering (NRE) required to facilitate new equipment into a parent craft’s design and the subsequent performance risk.
The potential outcome of such a scenario would have severe consequences across the US shipbuilding supplier base. The manufacturing companies that make up this shipbuilding supplier base are very specialized in responding to the unique requirements of our warships; their facilities are capital-intensive; they require a highly skilled workforce; they are familiar with stringent Navy requirements for operations in demanding environments (e.g. cyber security, shock, vibration, EMI, acoustic, etc.); their highly engineered products generally do not lend themselves to commercial markets; they provide critical business to 3rd and 4th tier suppliers within the shipbuilding supplier base; and the loss of the FFG(X) opportunity to US suppliers would increase the cost on other Navy platforms. Most importantly, maintaining a robust domestic manufacturing capability allows for a surge capability by ensuring rapidly scalable capacity when called upon to support major military operations—a theme frequently emphasized by DOD and Navy leaders.
These capabilities are a critical national asset and once lost, it is unlikely or extremely costly to replicate them. This would be a difficult lesson that is not in the government’s best interests to re-learn. One such lesson exists on the DDG-51 restart, where the difficulty of reconstituting a closed production line of a critical component manufacturer—its main reduction gear—required the government to fund the manufacturer directly as GFE, since the US manufacturer for the reduction gear had ceased operations. As a result, significant time and financial resources were expended by the government, shipbuilders and suppliers to reconstitute the ability to manufacture this critical component.
Without a clear statement from the government that the US shipbuilding supplier base will be a priority, the value of programs such as the FFG(X) to sustain the supplier industrial base are minimal. Furthermore, this flies in the face of the concerns expressed in the recent industrial base report about the decline of critical suppliers and loss of vital workforce skills.
Recommendation: In the absence of clear direction from the Navy on domestic sourcing of critical components on the FFG(X), Congress should consider providing such direction through a statutory requirement that key critical components must be US-manufactured.
ASSA Contact: Laura R. Haas, CEO - 434.249.7442 - Laura.Haas.ASSA@gmail.com
American Shipbuilding Suppliers Association 300 New Jersey Avenue, NW - Suite 900 Washington, DC 20001 434.249.7442 www.shipbuildingsuppliers.com